We’re Living Longer — Some More Than Others
The good news for low income workers is that they may not have the big retirement savings challenge they’ve been worried about. There is bad news, however.
In “Retirement Security: Shorter Life Expectancy Reduces Projected Lifetime Benefits for Lower Earners,” a new report
by the Government Accountability Office (GAO), the GAO notes that life expectancy varies substantially across different groups with significant effects on retirement resources, especially for those with low incomes. For example, according to studies the GAO reviewed, lower-income men approaching retirement live, on average, 3.6 to 12.7 fewer years than higher-income men.
The GAO put together the report in response to a request by Sen. Bernie Sanders (I-Vt.) that the GAO examine disparities in life expectancy and the implications for our nation’s policies regarding retirement security.
The GAO developed hypothetical scenarios to calculate the projected amount of lifetime Social Security retirement benefits received, on average, for men with different income levels born in the same year. In these scenarios, the GAO compared projected benefits based on each income groups’ shorter or longer life expectancy with projected benefits based on average life expectancy, and found that lower-income groups’ shorter-than-average life expectancy reduced their projected lifetime benefits by as much as 11% to 14%, raising questions as to how specific solutions designed to extend the sustainability of programs like Social Security, notably raising the minimum age for benefits, might affect lower income workers, for whom Social Security is their primary source of retirement income.
The report notes that, while there are many factors at play in the decline of defined benefit plans, increasing life expectancy adds to the challenges these plans face by increasing the financial obligations needed to make promised payments for their beneficiaries’ lifetimes. The GAO notes that plan sponsors and industry experts estimate that the Society of Actuaries’ 2014 revised mortality tables, if adopted for DB plans, would increase plan obligations by 3.4% to 10%, depending on the characteristics of a plan’s participants. The report notes that DB plan sponsors have increasingly been taking steps, known as “de-risking,” to either reduce risk or shift risk away from sponsors, often to participants.
Of course, a key reason that individuals face challenges in planning for retirement is that many people do not understand their life expectancy, the number of years they will likely spend in retirement, or the amount they should save to support their retirement. The GAO notes that a survey conducted by the Society of Actuaries showed that there is a greater tendency for retired respondents to underestimate rather than overestimate their life expectancy, and that older workers tend to retire sooner than they expected. Coupled with increasing life expectancy, this means they will likely spend more years in retirement than anticipated.
And life expectancy is more complicated than just figures concerning age — income level affects it as well. The GAO says that low-income individuals have a shorter than average life expectancy — which it terms differential life expectancy — and that this, in turn, reduces their projected lifetime retirement benefits. Not only that, says the GAO, the studies it has reviewed suggest the gap in life expectancy between those with high and low incomes has grown. And if that trend continues, progressivity in Social Security lifetime benefits likely will continue to shrink.
But does that differential life expectancy spell more serious implications than reduced progressivity? For instance, does it mean that Social Security becomes regressive? American Enterprise Institute Resident Scholar Andrew Biggs draws a distinction
between regressivity and reduced progressivity. “Yes, the program becomes a bit less progressive on a lifetime basis. But note, it’s a bit less progressive, not regressive. Even with differential mortality, low earners receive more in benefits than they pay in taxes while for high earners it’s the opposite,” he wrote in a column appearing in Forbes
One of the ways often mentioned as a means to address Social Security’s long-term financial challenges, the GAO notes, is to raise the retirement age. But, the GAO warns, this would not be progressive, noting that such an action “would further reduce projected lifetime benefits for lower-income groups proportionally more than for higher-income groups.”
Biggs distinguishes between raising the normal retirement age and the early retirement age (66 and 62, respectively, in common parlance). “Unlike raising the normal retirement age, raising the early retirement age is regressive because those who die between 62 and the new early retirement age, say 64 or 65, would not receive benefits. Because of differential mortality, those individuals would be disproportionately poor,” he argues.
In a subsequent Forbes piece, Biggs cites Congressional Budget Office (CBO) and Urban Institute studies that found that raising the normal retirement age can be progressive, since it reduces the benefits higher-income workers receive by more proportionately than it reduces those lower-income retirees receive. He adds that progressivity is enhanced by the fact that workers who receive disability benefits receive full Social Security benefits when they reach normal retirement age.
The GAO itself cites a 2014 CBO study that backs the conclusion the raising the early retirement age can be regressive. In that study, the CBO examined the effect of raising the full and early retirement ages and found that such an action would reduce lifetime benefits more for lower-income than for higher-income groups — and that this effect would be exacerbated if the gap in life expectancy between the two groups continues to increase. For good measure, the GAO adds that a 2015 National Academy of Sciences study showed similar results.
That’s not the first CBO study concerning raising retirement ages. In “Raising the Ages of Eligibility for Medicare and Social Security
,” an issue brief the CBO issued in January 2012, Noah Meyerson and Joyce Manchester say that increasing the full retirement age to 70 would cut Social Security outlays by approximately 13%. The study also says that raising the early retirement age from 62 to 64 would force many people to claim benefits later than they would have, and that they would receive larger benefits each month for fewer months. It also says that increasing the early retirement age “would tend to lower lifetime benefits for people with lower earnings, because those people tend to have shorter lives, and raise lifetime benefits for people with higher earnings, because they tend to have longer lives.”
The GAO notes that women are particularly at risk of outliving their savings because they live longer, on average, than men, although the gap between the sexes is diminishing. The report explains
that women age 65 and over have less retirement income, on average, and live in higher rates of poverty than men in that age group.
The Big Picture
Ultimately, the GAO, which makes no recommendations in this report, notes the trend toward increasing life expectancy may mean that more individuals outlive their savings, with only their Social Security benefits to rely on.